Ladies and gentlemen and thank you for standing by, and welcome to the H.B. Fuller First Quarter 2016 Investor Conference Call. This event has been scheduled for one hour. Today’s conference call is being webcast live and will also be archived on the company’s website for future listening. At this time, I will turn the meeting over to our host Senior Manager, Treasury and Investor Relations, Mr. Maximillian Marcy. Sir, you may begin.

Thank you, Tanisha. Good morning and welcome to our fiscal year 2016 first quarter earnings call. We have two speakers today, Jim Owens, our President and Chief Executive Officer; and Jim Giertz, our Executive Vice President and Chief Financial Officer. As always after our prepared remarks, we will have plenty of time to take your questions. Let me also remind you that comments made by me or by others representing H.B. Fuller may contain forward-looking statements which are subject to risks and uncertainties. Our SEC filings contain additional information about factors that could cause actual results to differ from management’s expectations. These filings can be found in the Investor Relations section of our corporate website at www.hbfuller.com. Also please note that our reported results include non-GAAP financial measures. These results should not be confused with the GAAP numbers in yesterday’s earnings release or the GAAP numbers that we will report in Form 10-Q. We believe that the discussions of these measures is useful to investors because it assists in understanding our operating performance and our operating segments as well as the comparability of results. A reconciliation of these non-GAAP measures to the nearest GAAP measure is provided in the earnings release our company issued last night. With that, I will turn the call over to Jim Owens.

Thanks, Max, and thank you everyone for joining us today. We are off to a good start to our year. We delivered solid revenue growth and margin improvement. And we stayed on track to track to deliver the full year results that we envisioned in our earnings guidance. Here are the important highlights from this first quarter. First, our margins improved significantly in the quarter compared to last year as we expected. Relative to last year, our adjusted gross margin was up 400 basis points and our EBITDA margin was up 320 basis points. Our gross margin also improved sequentially, up about 70 basis points versus the fourth quarter results. It is very unusual for gross margin to increase in first quarter of the year, due to seasonal patterns in our business. Our first quarter performance shows that our global efforts to reduce raw material costs, and improved supply chain efficiency, and increased productivity in our manufacturing operations is taking hold. The second highlight is the introduction of our new Engineering Adhesives operating segment. Last month, we marked the one-year anniversary of our acquisition of the TONSAN business. And we can say without reservation that it has been a very good year. The integration has gone smoothly and business has hit the financial targets that we laid out at the time of the acquisition. It is evident from the Engineering Adhesives segment results that TONSAN has a positive impact on the quality of our portfolio and profit profile since it became part of H.B. Fuller. The third and final highlight I would note is the performance of our business in Europe. For several quarters now we have been saying that our internal metrics were turning positive, which we viewed as a leading indicator of better future results. And in the…

Okay. Thanks, Jim. So Jim already provided an overview of our operating results, so I want to spend just a few minutes discussing a couple of unusual items from the quarter. We had an unusually large loss on the other income loss line of the P&L of about $6 million in the first quarter. This was almost exclusively driven by the devaluation of the Argentina peso versus the U.S. dollar that began in December of last year. We operate our Latin American region with the U.S. dollar as the functional currency. In Argentina we had accumulated a large trap cash balance position over the past several years due to various government restrictions on the remittance of funds. And these cash balances were denominated in pesos. In December the government loosened its foreign exchange regulations to allow for a more open market structure, allowing us to begin remitting our cash balances, which is a positive development. And unfortunately, in conjunction with this regulatory change the Argentina peso devalued significantly versus the U.S. dollar, creating the losses recognized in our first quarter results. We view this as a one-time event and the underlying exposure has now been essentially eliminated. Now just a few words about the tax rate in the first quarter. The tax rate on our adjusted earnings was about 31%, slightly lower than our guidance for 2016 of 33%. The difference was a one-time positive discrete tax item related to the renewal of the U.S. federal R&D tax credit that occurred late last year. The tax benefit that relates to last year’s net income is treated as a discrete item and the tax benefit related to the current year is incorporated in our core effective tax rate. The core tax rate, excluding the impact of discrete items, was about 33%,…

Thanks, Jim. Our fiscal year is off to a great start. We’re growing the business in our focus areas and improving the overall cost structure which is driving our margins higher. This year is about capitalizing on our strong foundation and delivering results based on the investments we’ve made. It’s the first year of our 2020 strategic plan. The plan revolves around driving continued growth in our Engineering Adhesives, hygiene and Construction Products business and emerging economies, while at the same time, optimizing margin performance in our other end market segments. Our plan is a solid continuation of what has gone well in our business, with a clear vision of what will improve going forward. During our February Investor Day we highlighted key elements which have changed in our long-term plan. A 3% to 5% growth target which reflects a slower global economy, a higher EBITDA margin goal of 17% as we drive portfolio enhancements and operational excellence and higher levels of cash flow generation which will be used to maximize shareholder value. Our first quarter results are in line with our strategic direction and momentum is building throughout our business. This start gives me great confidence in continued success for the remainder of this year which we will leverage into the coming years. We have built a strong foundation at H.B. Fuller. We have a clear vision of where we are headed and we have an outstanding team of people that are experts in our business and executing our plans effectively around the globe. We had a solid quarter but more importantly, we have strong momentum and a solid path forward into our future. This is the end of our prepared remarks, so now I look forward to answering your questions.

Thank you. [Operator Instructions] And we will go ahead and take our first question from David Begleiter. Please go ahead. Your line is open.

Hi, good morning.

Good morning, David.

Jim, Americas’ adhesives volumes, they actually look like they got worse in Q1 versus Q4. Can you give any more color as to what’s happening here and the confidence that this will turn, in the next few quarters?

Yes. The year-on-year is about negative 3%, I’m pretty certain that’s what they were last year, right. So it’s minus 3% in both years actually, I think 2.7% is what were this quarter. It’s the fifth quarter, right, since we went live on SAP and moved though those issues, it’s a fifth quarter of negative performance. It’s much better than we saw in Q2 and Q3 of last year, but similar to Q4. I think we have a pretty good view of the future based on our pipeline. Q2 we expect to still be negative, but not as negative, and Q1 we expect to see positive growth, I mean Q3, I’m sorry, Q3 we expect to see positive growth. I think you’ll see it turn positive in Q3. If you take before this SAP issue, that’s the last five quarters, the six quarters before that averaged about 3.6% volume growth. So this is a business that fundamentally has that kind of growth in a normal economic environment and I expect to see us get back to those kinds of numbers here in the starting with the second half of this year.

Have there been any changes to the sales force or the management team here over the last couple of quarters to drive the improvement?

Yes. So what we’ve done – I’ll give you a little more color in terms of some of the things we’ve done. As I said, fundamentally the issues we’ve had related to service issues and that really put our sales pros off of the game of offensively growing the business. But a couple of the changes we’ve made have been around getting re-focused on winning some key strategic accounts, and changing some of the incentive programs we have around some of the teams there to get really people back on the offensive of part of the game. When we looked underneath the covers, three of our four businesses are actually showing the kind of growth we would expect. The one that’s still behind the curve a bit is a little more consumer goods oriented. So packaging and those types of businesses have been the ones that have been slower to rebound and get back on the offense. But again, based on the wins we have in the pipeline I see that coming forward here.

Thank you. And we’ll go ahead and take our next question from Dmitry Silversteyn. Please go ahead your line is open.

Good morning. Just want to confirm a couple of things: On the TONSAN contribution, it looks to be about $22 million, $23 million in the quarter. Is that correct, in terms of revenue incremental to last year, having it for one month?

Again, we don’t report the details of the pro forma last year and the specifics of TONSAN. But I think the rule of thumb is, prior quarters, I would look at the pro forma of the business we bought about $25 million a quarter, Dmitry.

Right, okay. So, I guess what I’m getting at is the growth that you are seeing in Construction and EIMEA and the businesses is basically being offset by the weakness in Americas this quarter. And we’re probably going to see similar in the second quarter, but then we should see a ramp up in the second half of the year. Is that your view on the volume progression for the company overall?

Yes, real good growth in Engineering Adhesives, solid growth in each one of the other segments, and negative growth in Americas. As I said, Americas will be less negative next quarter and then positive going forward, and we expect all of the segments to be growing by Q3 including the Americas.

Okay. And then just as a follow-up on pricing, you’re still sort of maintaining very, very low-single digit sort of 1% price declines, actually less than that on the corporate level, about 0.5%. Is pricing environment still fairly disciplined? We’re starting to see some basic commodity pricing starting to tick up, or is there going to be sort of an extended tail, if you will, to your price concessions even if raw materials stabilize here? Can you talk a little bit about the pricing environment, and what you see for the next couple of quarters?

Yes. I think this low single-digit number is what you should expect overall from us. Now our business is different than a lot of other chemical businesses. About 13% of our raws are commodity oriented and every other one of our raws are supply demand managed in terms of the price. So when we have price movements with customers, either up or down, it often involves replacing raw material A with raw material B, and reformulating a new product that allows them to meet their needs. So I would say you’ll see some slight price erosion, but as you point out, Dmitry, in our business, low single digits is what you should expect.

Okay, thank you very much. I’ll get back in to queue.

Thanks, Dmitry.

Thank you. [Operator Instructions] We’ll take our next question from Mike Harrison. Please go ahead. Your line is open.

Hi, good morning.

Good morning, Mike.

Looking at the strong margin improvement in the Europe segment, it is really interesting to me that this happened in the seasonally weakest quarter. Is there a situation going on there where it’s easier to get manufacturing efficiencies and supply chain efficiencies when you’re running at lower volumes or lower utilization rates? And then, as we have to run the plants harder, we may run into some issues with throughput or with quality? Or have we truly turned a corner in that segment?

Yes. I think the short answer is we’ve truly turned the corner, I mean, I think you bring up a good point. If you look at last year, Q2, Q3, Q4 all improved sequentially. So we saw a nice progression on the EBITDA margins, but typically in Q1 in our business, there’s a big dip because of the amount of volume given December. So the fact that it was this strong in Q1 is a very good sign and it speaks, as I mentioned in my prepared remarks, it speaks to the work that’s going on all up and down the P&L. We’re growing, we’re doing good work on raw materials, manufacturing efficiencies are up. We did do this restructuring that we announced in November, so those SG&A savings are coming through. So all of those things together are driving it, and it bodes well for the rest of the year for our European business that our first quarter was this strong. So it’s good momentum, and no, to your other question, is there something new in our business that says that when we are producing more it’s going to be not as good. No, I’d say it’s going to strong throughout the year.

And then, just going back to some of the questions around the Americas’ adhesives volumes, as well as the pricing environment, in terms of winning back some of that lost business, first of all, my understanding is that it’s mostly in the packaging market. Are you needing to provide discounts in winning that back? Or can you maybe give a little bit more detail on how you’re getting back on offense? And what are some of the ways that you’re pursuing that business if you’re indeed not doing it with discounts or with lower pricing?

Yes. Well, a big piece of that business is as you can imagine our multinational consumer goods company, right. So people can make beverages, food products, and the cycle of which they make their decisions is a multi-year cycle. So they’ll hook up with a supplier for two, three, five years and that’s based on the service package we bring and the products and how we drive the productivity of their business. So the fundamental thing that’s happening now is we’re winning our fair share of those opportunities which we weren’t doing in prior quarters. So, and that starts showing itself up in future steps. So you’re right, packaging is the area where we have the biggest issue, but we can see very clearly the pipeline of opportunities and what’s happening with our fair share of wins. So that’s the change we see. You can see it in the pipeline, you can see it in the wins that have come through and it will show up in the numbers as we go forward here, the rest of the year. Did I answer your question?

Yes, it did. And if I could sneak in one more, just looking at the Construction Products business, if I look at it, the new segment format, which includes I think mostly Australia that moved in, it seems like the growth was slower under the new segment reporting than under the old segment reporting, suggesting that the Australia business or some of the foreign business that you brought in was growing much more slowly. Why is that? And is it something that you can improve as we go through the year?

So the real change we made, as we said, was the Engineering Adhesives change. But when we did that, we had the opportunity to bring Construction Products together as a global platform. Fundamentally our business in Europe and our business in Australia has shown slower growth and lower margins than our North American business. So the strategic intent in pulling that together is to improve those two businesses. So you can do the math and figure out what the margins are and what the growth rates are, but they’re fundamentally weaker and I think this segment reorganization around Construction Products allows us to really attack both the margin and the growth potential of both of those segments. And you’re right, one’s in Australia and one’s a small business in Europe. So I look at that is really an opportunity but it is – they are different businesses. We have, under the leader of that business separate P&L in each one of the three regions. And we’re pulling that together to leverage the strengths of each.

All right. Thanks very much.

Thank you. [Operator Instructions] We’ll go ahead and take our next question from Bruce Zessar. Please go ahead. Your line is open.

Hi, thanks. I had a question for Jim Giertz. On the issue of the Argentina devaluation – in the adjusted earnings that you presented in your earnings release, you didn’t add back that loss, right?

We did not.

Okay. So, if you add that back, then your adjusted earnings would be higher than $0.43. Do I have that right?

If we did that, but we did not. Yes.

Okay. And then on cash flow, I noticed that the first quarter cash flow from operations was about $23 million lower than in the prior first quarter. Could you just give some color on that, since we don’t have any data on cash flow from operations yet?

Yes. Well, I think that the – well, first of, I think the first quarter of 2016 our most recent quarter [Audio Gap] (27:35)-(27:39) a normal first quarter for us. Last year, our operating cash flow was I would say, unusually high, for just various reasons. Part of it was related to the currency movements that were going on in the first quarter of last year. But also just some of the other miscellaneous cash flow items were turning positive last year. I think it was an unusually positive quarter last year, so a tough comparison and a really solid first quarter this would characterize it.

Okay. And then, looking at fiscal 2015’s cash flow from operations that came in around $210 million, do you still think for the full year fiscal 2016 you should beat that number?

A little bit higher I think is our base plan – our operating cash flow should be just a bit higher than that.

Okay, thank you. I have no further questions. Thanks.

Thanks, Bruce.

Thank you. And we’ll go ahead and take a follow-up question from Dmitry Silversteyn. Please go ahead. Your line is open.

Yes. Just wanted to understand a little bit about the Engineer Adhesives, and you talk about this being a high-margin business, but the margin you delivered looks kind of low. Is that just because you sort of got the costs in, but not the revenues as you put this business together? And should we look for margins to ramp up meaningfully through the year? Or is it more of a 2017, 2018 before we see margins in this business really reflect the special nature of the products you’re selling through that division?

Yes. We talked a bit about this at Investor Day, Dmitry. We are investing heavily in the space to grow it organically. So I think if you look at the underlying margin performance, it’s very strong. But we’ve got extra SG&A that we’re putting in this business to enable growth and that’s both on the technical side and the commercial side. So gross margins, contribution margins are high with extra SG&A driven around our growth initiatives, and we expected that over time to improve. So we said that pro forma of the business is 12%, and by 2020, this business will be at 20%. And there’s a very clear path on how we’re going to do that.

Okay. And that’s basically going to revolve around volume growth, right, to leverage the SG&A costs that you’ve put in on the business?

Correct. Yes. It’s a business today that’s about $200 million and we’re going to grow it to be about a $400 million business.

Got it, and there is a high contribution margin. Okay, understand. Secondly, just on EIMEA portion of the business, you started off the year obviously very well with 3% volumetric growth. You expect that to continue, given that it’s driven by hygiene. And I’m not sure what’s going on in India that’s helping you specifically, but I’m assuming it’s something that you guys are doing rather than the economy overall. Are there any concerns that some of your other markets in Europe may slow down? I mean, we ended 2015 on a high note in terms of expectations, but from what I’m seeing, every data point that comes out of the European market is weaker than the one before. Is there any concern that there’s a slowdown taking place there that may inhibit your ability to continue to grow volumes?

Most of our growth is self driven. And as you know we struggled here because of some of the issues we’ve had. So there’s a whole energy around regaining business and winning with some of the innovations that we’ve introduced in other parts of the world. Obviously a stronger European economy helps us more than a weaker one, but most of this is within our control, certainly all of the things we’re doing in India and the emerging parts of our European business are in our control. So I’d say even with a potential European slowdown from where they were we’d expect to have positive organic growth this year in Europe.

It looks like you’re winning that business without having to sacrifice pricing because your price performance in EIMEA is actually amongst the leaders in your results here in the quarter, so that’s encouraging. Thank you very much.

Thanks, Dmitry.

Thank you. And we’ll go ahead and take our next follow-up question from David Begleiter. Please go ahead. Your line is open.

Thank you, Jim. What was the size of the Aussie business – of the construction business that was captured from Australia?

Yes. We don’t spell out the specifics of what gets pulled from which area. We are going to give you a lot of details here over the coming weeks in terms of what’s where but exactly what’s Australia and what’s Europe isn’t something we would split out. But you can see in the numbers that the combination of those, I think was around $40 million. So the combination of Europe and Australia that increased the segment size by about $40 million per year.

Okay.

We’ll give you those numbers specifically, how the segment came out.

Okay, thank you.

Okay.

We have one more question.

We’ll go ahead and take our next question from Mike Harrison. Please go ahead. Your line is open.

Hey, just wanted to sneak in one more. Thanks for taking it. Just in terms of the Q1 earnings number and your guidance, I was wondering if you could tell us where the $0.43 shook out relative to your expectations. Would we be right to conclude that at this point you have line of sight on the upper half of your guidance range? And maybe talk a little bit about what kept you from revising the guidance range higher?

Yes. So Mike, this is Jim G. So the results in our first quarter were slightly better than our internal plan. But the difference was less than the street consensus, if that’s what we compare it to. So we were a little bit above our plan and some of the things, some of the unusual items like the FX losses that we had in Argentina, we knew about most of those when we set our guidance for the year and when we communicated, because that happened in December. So a lot of these things have already been incorporated into our guidance. So I think that – I think we just feel like we got a good start to our plan and we’re still working the same plan and that’s why we left the guidance the way it is.

Yes, it’s one quarter, right? So it’s a good quarter and we’ll look to put four of them in a row.

All right. Thanks very much.

Okay, thanks everyone for your time today and for your continued support of our business and our company and our strategy. Thank you.

Thank you. Ladies and gentlemen, this does conclude today’s H.B. Fuller first quarter 2016 investor conference call. You may now disconnect.